August 10, 2011 / 1:40 PM / 9 years ago

UPDATE 3-Forest Labs wins ISS backing in Icahn board battle

* ISS backs all 10 nominees

* Comes after Glass Lewis backed 1 Icahn nominee

* Icahn ups stake in Forest to 9.2 percent

* Forest shares off 2.8 pct (Rewrites first paragraph, adds analyst comments)

By Lewis Krauskopf

NEW YORK, Aug 10 (Reuters) - Forest Laboratories Inc FRX.N won backing from proxy advisory firm ISS for all 10 of its board nominees, dimming the chances that billionaire investor Carl Icahn will win a significant presence on the drugmaker’s board.

The support for Forest comes after another proxy advisory firm, Glass Lewis, on Tuesday recommended shareholders support one of the four nominees put forth by Icahn. Still, ahead of the Aug. 18 shareholder meeting, Icahn was gearing up for the fight, disclosing he had increased his stake in Forest to 9.2 percent.

“I’ve always thought it was kind of a long shot to get board members on there,” Jefferies & Co analyst Corey Davis said. “The ISS recommendation probably seals it.”

One of Icahn’s major arguments for change weakened after the U.S. government decided last week not to pursue efforts to bar longtime Forest Chief Executive Howard Solomon from participation in federal healthcare programs. The government had initially moved against Solomon after the company settled federal charges last year of improperly marketing several drugs.

“The Street believes that Forest will be able to keep all the slate of directors they have nominated or they currently have and Icahn doesn’t have a great chance,” Collins Stewart analyst Louise Chen said.

Icahn was not immediately available for comment.

In addition to the government probe, Forest became vulnerable to an activist investor because it faces steep revenue declines as its products lose patent protection, a fate awaiting most of the pharmaceutical industry.

Revenue at the New York-based company, with a market value of about $10 billion, is projected to drop by about one-fourth after its Lexapro antidepressant loses patent protection early next year.

Company shares are worth less than half of what they were at their height in 2004 and about 40 percent less than peak 2007 levels, though they had begun to rebound before Icahn made his move.

After Icahn began his challenge in June, Forest named three new nominees to the board, while saying that two longtime members would not stand for reelection.

“There are benefits to their involvement that are still there even if they don’t get board seats,” Davis said of Icahn’s group.

NO ‘COMPELLING’ CASE FOR CHANGE

Thursday’s report from Institutional Shareholder Services found that Icahn had pointed to some legitimate concerns about corporate governance and Forest’s share price performance, but not enough to upend the board.

“Despite these concerns about how attentive the incumbent directors have been to the practice and responsibility of director independence, we do not find, on balance, that the dissident has made a compelling case that change is needed at the board level,” the ISS report said.

The report also found “little evidence to support the dissidents’ contention that the board has made major strategic missteps in planning for the upcoming patent cliffs.”

Glass Lewis said on Tuesday that shareholders should back one of Icahn’s nominees — Richard Mulligan, a Harvard Medical School genetics professor who sits on the boards of biotech companies Biogen Idec Inc (BIIB.O) and Enzon Pharmaceuticals Inc ENZN.O. [ID:nN1E7781Q3]

An Icahn victory next week could boost the stock, as investors may feel that he would agitate for a sale of the company. Duncan Williams analyst Irina Rivkind said she believed that that any win by Icahn would “result in an upward movement in the stock.”

Chen, however, said Icahn might need to get all four of his nominees on the board to spark a significant stock move.

“He’d have to get some meaningful amount of coverage,” Chen said. “I think it’d have to be all or nothing.”

Icahn’s previous stake of about 7 percent made him the second-largest Forest shareholder, according to Thomson Reuters data. With his increased stake, Icahn would still appear to rank second behind Wellington Management Co, which had a 12.2 percent stake, according to the data.

Forest shares were off 2.8 percent at $33.78 in afternoon trading on the New York Stock Exchange, slightly greater than the drop for the broader market. (Reporting by Lewis Krauskopf, editing by Gerald E. McCormick, Dave Zimmerman)

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